A Comparison of Black-Scholes versus Weibull Distribution Option Pricing Models in South Africa

Abstract

The purpose of this study is to compare the accuracy of two options pricing models, namely the Black-Scholes (1973) and Savickas’s Simple option pricing model (2002), in the pricing of options. The models were compared using data on options traded on JSE Securities (Ltd). This paper looks at the differences in option pricing models and the apparent shortcomings of the Black-Scholes model. The JSE data was divided into Puts and Calls, and longer dated versus shorter dated derivatives. A chi-squared test was used in testing the results, and it was found that the Savickas option pricing model yielded results that were a better fit with the JSE data than the Black-Scholes. This is true for both longer and shorter dated options and to a lesser extent for the Puts. The conclusion is that the Savickas option pricing model and its assumptions that share price returns follow a Weibull distribution, is more accurate in pricing options than the Black Scholes model. The Black Scholes assumption that share price returns follow a log-normal distribution seems to be unrealistic